France-based Pernod Ricard and US Fortune Brands, which produces Jim Beam, are aiming to combine resources to make the buy in an effort to compete against the world's largest spirit maker Diageo, the UK company currently valued at £22.8 billion (€33.3 billion).
In an official statement Allied Domecq said: "The Board confirms that it is in discussions with Pernod Ricard, which is working with Fortune Brands, regard a potential offer for Allied Domecq PLC by Pernod Ricard. These discussions are at an early stage and there can be no certainty that an offer will ultimately be forthcoming."
At the close of business yesterday shares in Allied Domecq were up 41.5 pence to 633 pence and have continued to rally throughout today.
Speculation over a takeover of Allied Domecq has been rife for since the beginning of this year. In 2004 the group, which produces the Malibu, Beefeater gin and Courvoisier brandy labels, reported a zero rate of sales growth, due mainly to the increasingly competitive global trading conditions.
It is believed that the sale of the Allied Domecq to Pernod and Fortune would lead to the company's brands being divided, but the details of the split are hard to predict. However some analysts believe that any split would probably occur in a manner that would minimise competition between the two companies.
Analysts are also worried that the current speculation could damage Allied Domecq's current credit ratings, further weakening its current position.
Jean-Yves Coupin, consumer credit analyst with BNP Paribas told the Financial Times, "Even if Pernod Ricard sells some of the Allied Domecq assets to fortune, it is likely to become a weak investment grade company, or even a cross-over credit to the high-yield market."